Shining a Light on Too Big to Fail in China
(Beijing) - Since Jiangxi LDK Solar Hi-Tech Co. Ltd. settled in Xinyu, in southeastern China's Jiangxi Province, the local government has gone out of its way to give it preferential treatment, making the company a focus of the local economy.
However, the manufacturer of solar modules, along with other similar Chinese firms, has encountered difficult times of late. In the past few years, these companies have built up large inventories even as demand has fallen off and profits all but disappeared. Naturally, LDK Solar ran up large debts.
All of this left the government with a choice: let the company fend for itself, or intervene, doubling down on its support. In fact, this wasn't much of a choice, as the government has reflexively lent even more support to the troubled company, bringing into full view the relationship between government and business in China.
Governments at the city and provincial levels have taken steps to protect LDK Solar's creditors and prevent the firm from filing bankruptcy. At the same time, the government has tried to find a white knight to buy the company, which employs thousands in Xinyu.
The situation in China's solar industry and especially at LDK Solar shows the degree to which government becomes involved, for better or worse, in the market in China and how some companies become too big to fail.
The Government Acts
The Jiangxi government gathered bank officials for a meeting in May. A bank source said the government vowed to allocate 2 billion yuan from its budget to ensure LDK Solar would not fail.
On July 12, the Xinyu city congress said it approved a proposal to incorporate 500 million yuan worth of loans LDK Solar borrowed from Huarong International Trust Co. into its annual budget. Xinyu also sent officials to LDK Solar to get involved in daily operations, and the officials have remained there.
Meanwhile, the government of Hefei, in eastern China's Anhui Province, where LDK Solar has a production facility, has started to mull bailout measures, a bank source in Jiangxi said.
This is not the first time the government has had to help the company. At the end of 2009, LDK Solar sold stakes in a subsidiary to a provincial government company for 1.5 billion yuan. This was intended to relieve a cash crunch brought on by the global financial crisis.
Ties that Bind
The local government in Xinyu has played an important role in LDK Solar since its arrival in 2005. Its first move was to raise 200 million yuan for the company. City officials also approved paperwork and provided benefits involving land and electricity prices.
Early on, Wang Dehe, former Xinyu party secretary, showed his excitement for the project, saying: "If we have a large company of this kind, it can enhance our city's reputation and people's awareness of it. In the future, if we can develop our city into a silicon town, solar companies can also make contributions to our local public finance."
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